Motley Fool Hidden Gems Investing - Live from FoolFest 2024!

Episode Date: July 15, 2024

We’re on with members in Washington DC looking ahead at some of the major themes of the market in 2024 and looking back at a decade of FoolFests.  (0:49) Matt Argersinger and Andy Cross discuss: - Why dividends and some specific market indicators are in focus at FoolFest. - What to watch as earnings season picks up – Netflix’s metrics game, and whether spend returns for big-ticket items at Home Depot.  - Some of our favorite memories from a decade of FoolFests and a few trivia questions to revisit Fool stocks and the market over a 10-year period.  Companies discussed: NFLX, HD, PLD, BABA, HUBS, NVDA, ANET, PANW, MELI Host: Dylan Lewis Guests: Matt Argersinger, Andy Cross Engineer: Desiree Jones Learn more about your ad choices. Visit megaphone.fm/adchoices

We're live from Washington, D.C. for FoolFest 2024. Motley Fool Money starts now. I'm Dylan Lewis, and I'm joined by Motley Fool analysts Andy Cross and Matt Argersinger and a room full of Motley Fool One members here in Washington, D.C. Matt, Andy, thank you for joining me. Fools, thank you for joining me. It is such a privilege to be here in person. It's FoolFest. We are here in Washington. I'm excited because this is my home city, and it's fun to host our members. It's fun to host our fellow Fools who aren't from D.C. We're going to have a lot of conversations about the market. We're

going to have a lot of conversations about stocks. Andy, Matt, you guys are both going to be on stage for the conversations. Give me a little preview. Matt, what are you excited to talk about for members? Well, my main man, Anthony Chavone, and I, who works with me on Dividend Investor, we're going to make the case that dividends are about to make a big comeback. At this moment right now, and it's so sad for me to say this, but the yield on the S&P 500 is a paltry 1.2%. That is the second lowest, guys, outside the dot-com boom in early 2000. We kind of know what happened after that. But up until about 35 years ago, if you go back through history, even going back to the 1870s, the average dividend

yield was 4.5%. What happened? We're going to talk about that. We're going to share some of the reasons why we think the dividend yield is so low today in the market. We're going to, more importantly, share reasons why we think the dividend yield is about to take a big rise up. Part of it has to do with interest rates, but there are a lot of other reasons why we think dividends are going to make a big comeback in the market. I think the paradigm has really shifted. We've already seen a lot of companies, well-known companies, Alphabet, Meta, Salesforce initiate dividends. I think Amazon, in the next 12 months, put me down for this, is going to initiate a dividend as well. So, dividends are making a

comeback. We're going to talk about that. I'm excited to get into a lot of the data we're going to share. This is breaking. You're breaking news right here. That's what we do on the show. That's fantastic. I love it. Andy, what are you excited to talk about? Yeah, we're closing out. Before questions and answers, the last event, we are going to be discussing about markets, artificial intelligence, the potential growth indicator, also known as the PGI, which is a metric that we've been using and tracking that Tom created that measures the cash on the sidelines in money market accounts, savings accounts essentially, versus the value of the

stock market valuations. And so it's just an indicator about enthusiasm or caution that investors may be feeling depending on where they're putting their money, whether it's in the markets or whether it's in the savings and in the money market. So, talking a lot about just the markets in general and about artificial intelligence and how that is impacting both what we are doing as analysts, as researchers, and then, of course, what's happening with companies across the landscape. So, I'm excited to get on that, and it closes out the event, so I know we better be good. Yeah, you got to bring us home. We got to bring us home. Yeah. Well, we are here on-site, but the market is not hitting pause. We have a big kickoff week for earnings ahead of us.

We have more of the big banks reporting. We have many of the credit card companies reporting, TSMC, ASML over on the chip side, Netflix reporting. Andy, looking out at this earnings season, knowing we're going to be seeing several weeks of big-time earnings reports, what are you looking out for? Well, Netflix was fascinating, because recall, just a few months ago after the first quarter, the stock fell 9% or so after they announced a really pretty outstanding quarter. But they came out with some news that they are continuing to not report some metrics that a lot of investors rely on, including things like average revenue per subscriber.

They had already announced that they're not going to be talking about subscribers as much, but including now, not including the numbers about how many subscribers they're adding each quarter. And so, I think investors, while the quarter was outstanding, and it showed growth of 16% on the total number of streaming additions that reached $270 million now, they added $9.3 million last quarter, they raised their operating margin guidance, still expecting revenue growth of 13% and 15% for the year, the news that they are cutting back on some of these key metrics, I think, shocked a little bit of the investors. However, I think going forward, Netflix truly has become now this company that, while subscription volumes and growth are important, it really is about the revenue and the cash flow as they look to build out their advertising business. I do hope they continue to give some percentages about how many subscribers when they add are coming from the advertising side as opposed to the paid side.

But we're not going to get the metrics that we used to see. So, that's, I think, causing some concern for some investors. But it really is a cash flow now story as they are generating so much cash and so much revenue that they are putting to use in lots of different ways, including more live programming. It's kind of an interesting time to check in on Netflix because we have almost perfectly retraced that 70% drop that happened, I think, in the first half of 2022. The stock is not at all-time highs, but it is up there, and the streaming landscape continues to be incredibly competitive.

We were talking a little bit before we hopped on the stage, and I'm curious, I want to use the benefit of this live audience to get a sense of something we were talking about. Just out of curiosity, show of hands in the room, how many of you have an active Netflix subscription? About three-quarters of the room? 80% of the room? Yeah, almost everyone. Alright. What about HBO Max? Or Max, I suppose? Much fewer, maybe 25%. Okay, Apple TV? Oh, a little bit better, about half. Paramount? Oh, sad. Oh, no, no, no, it's Rowling. Star Trek fans, maybe?

There are just some late hands there. But I think what we were kind of hypothesizing before we hopped on stage was, Netflix is perhaps the most important brand name in streaming, and maybe the one that people cancel last. It seems to be the case here, Matt. I think so. I mean, I was telling Andy and Dylan, I haven't watched a Netflix show in like six months, but I keep paying every month. And I've been doing that for, gosh, 10 plus years now. It does feel like that one that everyone defaults to, no one cuts. And maybe because Netflix has done a great job of maybe every few months has something that attracts our attention. I think it goes back to their data advantage, their history. They got into

streaming, obviously, well before a lot of the other competitors. And so, they know us the best. And I think they are able to kind of, I mean, I always, I get an email from Netflix maybe once a week that says, hey, Matt, there's a show or a documentary you might like. And generally, I click on that email. And now that I'm like, yeah, I kind do want to watch that. I'll add it to my queue. I probably won't watch it. But guess what? I love getting that email. It makes me feel good. And I just feel like Netflix does a great job of keeping me engaged, even though, gosh, my minutes and hours watching Netflix is about as low as it's ever been. You need to listen to their recommendations. I do. I do. Dylan, for the

upcoming quarter, when they report earnings on Thursday, the things I'm paying attention to continues to be the advertising business. So, in the markets where they have the advertising option about 40 of the new members who join are coming on that ad that ad side and it's the bulk of the growth it's not in all markets but but they're pushing out there so more interest and more uh details on the ad business we're not going to get some of those metrics we had before and they're pretty good of highlighting all the great content they have and they do as matt was saying like they they just have become the the the one thing you can't really give up because of what they are doing both on the scripted programming as well as the more and more on the live programming.

The ad side, I just want more insights into the ad business, because that can be a real growth over the next five years of Netflix's overall revenue and cash flows. Matt, I know when it comes to earnings and companies, you tend to look at a lot of the bellwether companies. What are you looking at this earnings season? For me, there's really two bookends to this earnings season. Prologis reports later this week. If you don't know Prologis, it's the biggest industrial real estate company in the world. Business on four continents, 1.2 billion square feet, 6,700 tenants, Amazon being the largest. To me, it's just a bit of a bellwether for understanding

demand on the corporate side. If you're a very large company, you're managing inventories, you're managing supply chains, you have distribution channels all over the world, you're likely using Prologis or at least one of their competitors. They report later this week. I'm very excited to see what they have to say, especially since they talked a little bit about softness on the leasing side earlier this year. That potentially is going to get better as the year goes on. They already talked about the fact that Amazon is already actually upping its space needs. That'll be fascinating to me. Then the other side of earnings season, this happens around mid-August, is when the Home

Depot reports. If Prologis tells me something about the business industrial side of the economy, Home Depot tends to tell me about the consumer side of the economy, because it's also so plugged in, of course, to the housing market, which here in the U.S. is so important. And Home Depot has had a really difficult 18 months or so. If you look at their comps, they've been kind of flat to negative. Big-ticket items like lumber and appliances have been slow to sell. And it tells a little bit of a story about a consumer that's spending less on big-ticket items, more on travel experiences, and about the fact that we have this stuck housing market.

The existing housing market, which is obviously the bulk of the housing market in the U.S., it's been stuck. It's stuck for good and bad reasons. Stuck because mortgage rates are high, but because a lot of existing homeowners, probably like you in this room, if you have mortgages, have a mortgage rate that's 3%, 4%, maybe even 2.5%. I've talked to some people. And it's tough to give that up, even if you wanted to, to move up to another house or a second house and take on a mortgage that today is going to be 6.5%, 7%, maybe 7.5%. So, it's just this stuck housing market. Until that gets unstuck, we might not see a lot of relief on that side. But maybe the Fed cuts rates later this year.

Maybe mortgage rates start to come down. Maybe that gets this housing market unstuck. And so, Home Depot is my window into that market. Matt, I hear you say there, until it gets unstuck. And I look at a company like Home Depot, and that is firmly in the bucket of not going to get displaced for me. It is one of those businesses that is not going anywhere. Is this really just a matter of looking out into the future, say, hypothetically, results are not exactly what we want to be seeing. It's more a matter of when, not if, we start to see that demand come back.

And perhaps, if we see a dip, it actually might be a good time to be buying shares. Absolutely. It's always been a win for Home Depot. They've been so good at playing and benefiting from the various cycles. And investing, by the way, investing in their pro side, in their distribution businesses to the contractors, that's really diversified the revenue stream much more so over the last 10 years. This is a company, to me, that has a tremendous staying power. Even in this period where you look at the housing market, it's been pretty abysmal in in terms of transactions, business has still held up for them.

And it's a great dividend company as well. Matt, they closed that big distribution deal. I think it was like $18 or $20 billion, the big one, that continues to build out that connections and that network for the distribution side and the professional side and the contractor side. And so when I think about Home Depot, and it's one of my longest-holding, I think it is my longest-holding position and one of my largest positions, and while the stock has not done that well,

The continued network that they're building out, so we look at the next five years, especially on the professional contractor side, is really where Home Depot thrives and competes so well against other competitors, including Lowe's. Right. It is awesome to be at Fool Fest. It is always special to be at Fool Fest. It is particularly special, I think, this year to be at Fool Fest, because our first Fool Fest was in 2014. We are coming up on a decade of Fool Fests, which is essentially a time-holding period that we would be comfortable with if we were looking at companies. It's also a very long time in terms of memories and interactions with members. Looking back on the past decade, Andy, what jumps out to you?

Well, I was talking to producer extraordinaire, Matt Greer, who's been with us for so many years and has helped with so many different shows. He and I were just recounting. I think it was actually the 2014 fool fest we were talking about the uh conversation we had with malcolm gladwell the author of the outliers and the tipping point uh and just a really um eccentric kind of interesting great thinker and writer and he had a quote there that mac and i were were recounting um that says along the lines and i'll just read it here i've become more and more convinced particularly from writing uh this book and i forget which book it was at the time But also just from my experience is this, the company culture is the hardest thing to quantify, but the most important predictor of where a company is headed.

So it gets back to the famous quote of culture eating strategy for breakfast by, I think, Peter Drucker. And the idea of that when you're investing in business, especially if you're investing in it for many years, really understanding how the leadership team is set up, how the culture is set up. How are they compensated? How are they thinking about treating their employees and all their stakeholders? And so that was continued evidence, as David and Tom and many others across the investing team have just paid a lot of attention. It's not the only thing. There are a lot of factors that go into investing. But I think a little bit different is understanding the leaders who are behind the companies. And of course, at the places like Fool Fest, including this week, we're interviewing different CEOs and talking to different leaders. And that's just really fun. And it's it's a it's a fun intellectual endeavor to try to get underneath what the strategic and the cultural ambitions are for any leadership team.

Yeah, we'll be hearing from leaders at Kinsale and Kava. So that's an opportunity for us to kind of get a lens into that. Matt, what about you? Yeah, I was thinking back to the last 10 years, and I guess my brain immediately went to 2019, the Fool Fest. Anyone remember attending Fool Fest in 2019? I believe it was in National Harbor. I've got some hands. Okay. Gosh, we were so innocent back then, weren't we? And healthy. And healthy, yes. I mean, I just had a son. I mean, it was just a happier time. And then, of course, we know what happened in 2020.

But I'm going to cheat a little bit, Dylan, because there was another event that we had that October for our ONE members. I think maybe many of you attended that. I think that was in D.C. I know it was in D.C. And there was a special event that we had as part of that one event, which was we had an evening reception at Nobu Restaurant just a few blocks from here. Actually, anyone in this room attend that? Okay, just a couple of hands. A couple of hands.

And so, what was amazing about that was, we had just recently launched our Millionacres brand as part of The Motley Fool, which was making private equity investments in real estate. And one of the investments we made was in that Nobu restaurant. It had come up for sale just a few months earlier. We had made an investment in it, and a lot of our members who were dining and enjoying that reception at Nobu that evening were owners of that restaurant and still remain owners today.

And the restaurant's doing quite well, of course. But to me, it's just that it's a story about pre-pandemic. We're at a restaurant. That restaurant eventually shut down for three or four months in early 2020, as a lot of restaurants did. It kind of had to pivot to take out and some other things. And then it reopened, I believe, late 2020, maybe early 2021. And now it's a thriving restaurant. And the Nobu brand, of course, is really strong. But it was just this evolution that we've had since 2019 to today. And it's just nice to see the market's at all-time highs.

We've come through it as the United States And our economy tends to do But I remember I was like What an innocent time in 2019 A happy innocent time And we got through it And we're still happy today I'm going to give some love for Fool Fest 2022

The first one back after we missed some time I think that was a particularly special one It was one of the first ones That I was a little bit more involved with And I enjoyed that one a lot Now that I've got you both reminiscing a little bit I am going to take the chance To look back on 2014

the year that we had our first FoolFest, and throw a little bit of trivia at you. My first question for this trivia round, this company came public in 2014 as the largest IPO of the year. It raised over $20 billion with its issuance, giving the business and its visionary founder plenty of capital to grow in their home market outside the United States. I was going to say, I think I got it too. No, you go first. I was going to say Shopify. No? Alibaba.

Yes. That's right. Alibaba, the visionary founder, Jack Ma, and that early investor that wound up also getting access and having tremendous returns, Masayoshi-san at SoftBank. What's interesting about that is, Alibaba was the largest IPO of 2014, but not the most successful when it comes to investor returns. Actually, if you look at the stock chart, it's not particularly inspiring. I think a lot of those Chinese tech companies have had a pretty tough time. I want to throw some of the other 2014 IPOs at you and just get some reflections. We have GoPro, HubSpot, King Digital, Grubhub, and Zendesk. A couple

names there from the Fool universe. Any thoughts there? Well, the HubSpot is fascinating, just considering what is happening in the news recently about potentially Google acquiring it, then not acquiring it, now Google going after maybe a cybersecurity company. I'm guessing, of those, HubSpot probably did the best. Up 1,500% since IPO. The S&P 500, a modest 190%. How did GoPro do? Not as well. Down about 95%. And I think King Digital, if I remember, got acquired by Activision Blizzard, right?

I think that's right. The Candy Crush company? How many of those were acquired? Do you know? GoPro was. Several. King Digital was. King Digital was. Zendesk was as well. And I think Grubhub was also acquired by Just Eat Takeaway internationally. So, yeah, a lot of acquisitions scooped up there.

All right, question number two for you, reflecting back on 2014. We know NVIDIA today as a $3 trillion company. A decade ago, it was a bit smaller. There were plenty of reasons to be excited about NVIDIA then. It was a key supplier to hardcore gamers, which is why it was a stock advisor wreck in 2005 and in 2009. But in 2014, AI was just a glimmer in Jensen Huang's eye. At its peak that year, what was NVIDIA's market cap? A, $1 billion to $5 billion? B, $5 billion to $15 billion? C, $15 billion to $25 billion? Or D, over $25 billion? I'm going to go with B. What was it, $5 billion to $15 billion?

$5 billion to $15 billion? Yeah, I'm going to go with $5 billion to $15 billion. You absolutely nailed it. NVIDIA peaked out at $11 billion for its market cap in 2014. It was overvalued then. It always has been. And I think that's the hard part. To get to that $3.1 trillion figure we know it as now today, it did better than 75% annualized returns over this decade. Just incredible. And by the way, I don't know what the drawdown was during that time period. Matt was talking about Netflix falling 70% at various points. But there's no doubt that Nvidia has had those big drawdowns, maybe more than one, during that 10-year run.

I think the thing that I'm always trying to remind myself of with a company like NVIDIA is, great companies can continue to find that next wave. It was gaming for a while, then crypto became a tailwind for this business, and now AI is the tailwind. If I could share a quick NVIDIA story. This is 2010. I believe we had the CTO of NVIDIA come to The Motley Fool for a brief conversation with some investors. They were lamenting the fact that that the new Call of Duty game, which I don't even know what version of that game came out, was not going to use their GPU for some of the processing of that game. And they were so disappointed, because that was going to mean a 20% hit to revenue that year.

I mean, just to think that the fact that that's what they were talking about in 2010 was just, well, you know, our newest GPU wasn't showing up in the new Call of Duty game. It was a big hit to our business. So just a quick look here. So, it looks like during the 10-year span, NVIDIA had fallen 25%, more than 50%. I think that was during the crypto wave. And then, of course, during COVID, when it fell, gosh, looks like 70, no, not quite 75, maybe 60% or so. So, that 75% return annualized, which is just incredible for a company, even starting at $10 or $11 billion, still incredible.

to earn that return, in hindsight, is very easy, but it's very hard to do it when you're in the middle of it and your stock's down 60% or 65%. All right, my final question for you. 2014 was a particularly good year for the Rule Breakers scorecard at The Motley Fool. Three different recommendations that year went on to become 10 baggers or more, and each have been wrecked several times since. One is in cybersecurity, another in e-commerce, a third in cloud connectivity. Can you name any of the three 10 baggers from the Rule Breakers scorecard? Matty, this is your house right here. You're on the team. I was going to say, I was on the Rule Breakers back then, which is sad that I don't get

this. Palo Alto, maybe the cybersecurity one? I was going to say Palo Alto. What were the two other categories? We have e-commerce and connectivity, networking. Okay. I'm going to go with Shopify for the e-commerce one? No. Oh my gosh. MercadoLibre? Yep. Oh, I was kidding. And then connectivity. My gosh. Or cybersecurity. Or any guesses? Any guesses from the audience here? Yeah, I'm not sure. Palo Alto. No, we had, wait, Palo Alto we already had for cybersecurity? Yeah. The third one is Arista Networks. Arista Networks. Ah, networking, yeah. And reflecting on that, I think what was amazing to me in putting together show notes is just the number of 10-baggers. That's an incredible run for the

Rule Breakers scorecard in one year. And also, every single one of those companies was wrecked another time after that. And many of them, many more times. I mean, MercadoLibre has been wrecked a bunch. It is one of my largest holdings. It's a company that I absolutely love. But I think all three of them kind of demonstrate the continue to buy quality companies. Yeah, and certainly, Dylan, I imagine looking at the scorecard from 2014, there are certainly ones that have not worked out nearly as well. Like, you know, whatever the S&P is over the last, you know, 10 years, maybe 12 percent, 11 percent, something like that, annualized. Like, there are certainly ones that don't work out. But those ones that do work out, that you continue to hold and build out positions into as they go through those ups and downs,

If for those of us who can, those are the kinds of ones that can be the stables of your portfolio that then you're looking back 10 years and like, wow, I'm just I'm continuing to lag. Well, I have some ones that have not worked out and we clearly do. Those that have worked out are really driving the bulk of the returns to the portfolio. Right. I mean, Morgan Housel had a mindset recently and he'll be speaking tomorrow at Fool Fest, by the way. He looked back at Warren Buffett at some point and had written that, you know, Warren Buffett over his career has bought 500 companies, something like that, 500 stocks. But really, 90% of his returns have come from five positions. And so, that's what it is. I mean, I look at MercadoLibre in my own portfolio, and man, it's made up for a lot, a lot of mistakes.

And that's the beauty of Rule Breaker investing, I think. And that's what, you know, you are, I've always thought of Rule Breakers as venture capital investing in public markets. And you can hit, if you hit the 20, 50 baggers or 100 baggers a few times, wow, it makes a huge difference. All right, I'm going to wrap this up here by just adding that, in addition to all of those things in 2014, 2014 was the year that I joined The Fool. And I mention that mostly to acknowledge I've been here a decade, and I'm the least tenured person on the stage. And I think if we look out in the audience, there are probably a lot of people who have been here quite a bit longer than me. I maybe am still on the early side when we look out at this room full of members.

and mostly I mention all this to say you guys have been here since before Fool Fest existed in many cases we're really excited to share the next couple days with you we're really excited to share the next couple years with you and we're really excited to share the next couple decades with you that's going to do it for this Motley Fool Money episode

the show was mixed by Desiree Jones I'm Dylan Lewis, we'll be back tomorrow from Fool Fest again, thanks for listening well done We'll see you next time.